Exercise Chapter 4

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FOUNDATION OF FINANCE - 702021

CHAPTER 4: VALUING COMMON STOCK


Question 1: Assume General Electric (GE) has about 10.3 billion shares outstanding
and the stock price is $37.10. Also assume the P/E ratio is about 18.3. Calculate the
market capitalization for GE.
Question 2: Company XYZ reported earnings per share of $5 last year and paid $1
in dividends. Caculate the dividend payout ratio and plowback ratio.
Question 3: The Wall Street Journal quotation for a company has the following values:
Div: $1.12, PE: 18.3, Close: $37.22. Calculate the dividend pay out ratio and plowback
ratio for the company (Approximately).
Question 4: You have some extra money to invest for one year. After a year, you will
need to sell your investment to pay tuition. After watching CNBC or Nightly Business
Report on TV, you decide that you want to buy Intel Corp. stock, rate of return is 12%.
You call your broker and find that Intel is currently selling for $50 per share and pays
$0.16 per year in dividends. The analyst on CNBC predicts that the stock will be selling
for $60 in one year. Should you buy this stock?
Question 5: Imagine that you want to purchase a stock that is selling for $20. The
expected dividend next year is $1.75 and analyst forecast the stock price one year
from today being $22. According to the capital asset pricing model the cost of equity
is 12%. Using the one-period valuation model. What should the stock be selling for?
Should you purchase it?
Question 6: If Fledgling Electronics is selling for $100 per share today and is expected
to sell for $110 one year from now, what is the expected return if the dividend one year
from now is forecasted to be $5.00?
Question 7: Super Computer Company's stock is selling for $100 per share today. It
is expected that this stock will pay a dividend of 6 dollars per share, and then be sold
for $114 per share at the end of one year. Calculate the expected rate of return for the
shareholders.
Question 8: Current forecasts are for XYZ Company to pay dividends of $3, $3.24,
and $3.50 over the next three years, respectively. At the end of three years you
anticipate selling your stock at a market price of $94.48. What is the price of the stock
given a 12% expected return?
Question 9: Deluxe Company expects to pay a dividend of $2 per share at the end of
year 1, $3 per share at the end of year 2 and then be sold for $32 per share. If the
required rate on the stock is 15%, what is the current value of the stock?
Question 10: Von Bora Corporation is expected to pay a dividend of $1.40 per share
at the end of this year and a $1.50 per share at the end of the second year. You expect
Von Bora's stock price to be $25.00 at the end of two years. If the required rate on the
stock is 10%, what is the current value of the stock?

GVTH: THS LE BAO THY 1


FOUNDATION OF FINANCE - 702021

Question 11: Fledgling Electronics is forecasted to pay a $5.00 dividend at the end of
year one. At the end of the first year the stock will be sold for $100, the growth rate of
dividend is 10%. If the discount rate is 15%, what is the price of the stock?
Question 12: The required rate of return is 12 percent. Ninex Corp. has just paid a
dividend of $5.87 and is expected to grow at a constant rate of 4 percent.
a. What is the current price of the stock?
b. What is the expected price of the stock three years from now?
Question 13: Perry, Inc., paid a dividend of $5.5 yesterday. You are interested in
investing in this company, which has forecasted a constant-growth rate of 5 percent
forever. Your required rate of return is 8 percent.
a. Compute the expected dividends D1, D2, D3, and D4.
b. What is the value of the stock today?
Question 14: Consider the following three stocks:
a) Stock A is expected to provide a dividend of $10 a share forever.
b) Stock B is expected to pay a dividend of $5 next year. Thereafter, dividend
growth is expected to be 4% a year forever.
c) Stock C is expected to pay a dividend of $5 next year. Thereafter, dividend
growth is expected to be 20% a year for five years (i.e., until year 6) and zero
thereafter. If the market capitalization rate for each stock is 10%, which stock
is the most valuable? What if the capitalization rate is 7%?
Question 15: Northwest Natural Gas stock was selling for $42.45 per share at the
start of 2009. Dividend payments for the next year were expected to be $1.68 a share.
What is the dividend yield, assuming a growth rate of 6.1%?
Question 16: Our company forecasts to pay a $8.33 dividend next year, which
represents 100% of its earnings. This will provide investors with a 15% expected
return. Instead, we decide to plowback 40% of the earnings at the firm’s current return
on equity of 25%. What is the value of the stock before and after the plowback
decision?

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THE END

GVTH: THS LE BAO THY 2

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